With the rise of multiple prime brokers, what are the challenges for fund administrators?

Multiple prime brokers are not new, but the trend accelerated after the demise of Lehman Brothers. There are still challenges for fund administrators in providing a seamless service to clients using multiple primes, particularly as there is a lack of standardisation across systems.

For John McCann at Trinity the main challenges are electronic connectively, trade capture and transactional processing via the disparate IT systems that prime brokers use. “We need to arrive at some form of commonality or standardisation,” he advocates. “The administrator is the only single repository of consolidated data so the ability to perform this role takes on even greater significance for the fund,” concludes McCann.

At Bank of Ireland Securities Services, Liam McNiffe agrees. “Multiple prime brokers mean multiple data sources and multiple reconciliations. The ability to automate the exchange of data with third parties and being able to auto-reconcile balances (cash and holdings) is critical in achieving an efficient and controlled process,” he says.

Reconciliation work has increased exponentially as a direct result of the prudent response of managers to recent economic developments, points out David Aldrich at BNY Mellon. “The burden falls both on administrators and on the back offices of the fund managers, creating a more expensive operating environment,” he says.

“Multiple prime brokers mean multiple trading accounts for the administrator to reconcile,” notes Akshaya Bhargava at Butterfield Fulcrum. Administrators need to have connectivity to all the prime brokers and be familiar with their (often widely) different reporting standards.

“The administrator also must consolidate all information and provide the client with reporting on the aggregate portfolio so all required data must be available from all the different prime broker’s systems,” concludes Bhargava.

According to Oliver Scully at Citco, it is ultimately about cost and efficiency. “The systems and controls exist but more relationships mean more reconciliations and third-party communication. The increased workload cannot be mitigated by technology and efficiency alone,” he says.

“Fund administrators are a natural data aggregation point for funds with multi-prime relationships,” says Richard Ernesti at Citi, echoing others’ comments. “The main challenge for administrators is to demonstrate their ability to source and process trade data reliably, quickly and accurately. To do so they need to have effective data transport mechanisms as well as maintaining inter-personal relationships with prime brokers so that should issues arise, there’s the ability to interact successfully,” advises Ernesti.

“Frankly,” says Dermot Butler at Custom House, “there should not be many challenges because today most administrators are able to handle multiple prime broker accounts. If it is a challenge for the administrator, then that administrator has presumably got a second-tier system.”

Stephen Castree at Equinoxe believes the increase in the mini prime has effectively further segregated the market and has driven the need for administrators to increase flexibility in file format while at the same time maintaining a greater volume of relationships. “This suits those with a broad base of senior management experience as well as those with a strong technology solution for data upload and reconciliation,” he says. “For less sophisticated administrators this will clearly be more problematic in terms of maintaining both relationships and service levels,” adds Castree.

The multiple prime broker trends require seamless technical connectivity to multiple prime brokers, advises Hans Hufschmid at GlobeOp. He also thinks greater levels of counterparty risk, collateral and data management are a consequence of multiple primes.

The main challenge for Paul Stillabower at HSBC Securities Services is meeting the obligation as fund valuation provider, particularly for hard-to-price assets. “As far as the technological and process requirements of servicing a fund with multiple prime brokers, this is not an issue for a provider such as HSBC,” he states.

“Fund administrators must ensure that their processes offer a streamlined approach to trade capture and reconciliation across multiple prime brokers,” declares John Buckley at Omnium.

David Morrissey at SEI notes that with the increased scrutiny by institutional investors and the fact that investment managers need the ability to work with multiple prime brokers, third-party administrators are even more important. “The independence and flexibility that an administrator adds could be compromised by having a single prime broker serve both functions,” he cautions.

“The requirements of administrators will be increased as the need for their own infrastructure and technology becomes increasingly important to link to multiple organisations,” he concludes.

One of the challenges for administrators is to streamline and standardise communications and reconciliations with prime brokers as much as possible, notes Deborah Yamin at State Street.

Peter Hughes at Apex Fund Services says multiple prime brokers should not represent a challenge to administrators with efficiently designed processes and automated systems. “Those offering middle-office functionality working as it should, should not see a significant burden from this,” he concludes.